Political and Economic Dynamics of Inflation in U.S. Military Spending

Introduction

The American military budget inflation is a difficult question, involving diverse political, economic, and institutional factors. The rate of military inflation in 1940 was on an advancing track compared to the non-military governmental sector and with respect to the entire economy (Fordham, 2003). With such regard, trying to figure out the exact cost of military spending through time becomes fairly challenging. In the seminal work “The Political and Economic Sources of Inflation in the American Military Budget” by Benjamin O. Fordham, reasons for the existence of that reality are listed as follows: public sector inflation induced by labor intensity, the cyclic nature of military spending, and the effect of the Pentagon on deflator series. This article thus consolidates Fordham’s work and relevant literature to serve as a basis from which to understand inflation in the U.S. military budget.

Public-Sector Inflation and the Military: Baumol’s Disease

Another more general explanation for the rise of public-sector inflation is relative inefficiency within labor-intensive government services compared with the capital-intensive private sector having greater gains in productivity. This process is often referred to as “Baumol’s disease” wherein the private sector wages rise due to improvements in productivity. The public sector has to do so to compete for workers, even though productivity does not rise (Baumol, 1967). This has led to higher and higher inflation rates in public-sector services, such as education and law enforcement (Baumol & Bowen, 1966; Spann, 1977).

However, Fordham 2003 finds this explanation applies only weakly to military inflation. Military goods and services are not necessarily labor-intensive so the relevance of Baumol’s disease is limited. Military wages did go up in the post-draft era, especially from the 1980s onwards, but the military largely escaped the effects of Baumol’s disease through substitution of labour with capital. For example, even as military real wages rose during the 1980s, personnel numbers plummeted — sharp decline consistent with the substitution of capital-intensive technologies, such as advanced weapon systems, to compensate for…